"EIM, RTOs, and FERC Jurisdiction: Does Participation in a Regional Energy Imbalance Market Subject Public Power to FERC Jurisdiction?": Eric Christensen Publishes Article in May NWPPA Bulletin
May 15, 2013 posted by Eric Christensen
EIM, RTOs, AND FERC JURISDICTION: Does Participation in a Regional Energy Imbalance Market Subject Public Power to FERC Jurisdiction?
By Eric Christensen, Partner Gordon Thomas HoneywellThe rapid rise of variable renewable resources, especially wind power, has put increasing pressure on the West's electric system to balance the rapidly fluctuating output often produced by these resources. In response, a regional Energy Imbalance Market ("EIM") is now under active consideration. The EIM would allow Balancing Area Authorities ("BAAs") to obtain balancing reserves from across a broad region, in theory allowing more economic and reliable operation of the region's balancing capacity. Public power has greeted EIM with considerable skepticism, observing that Regional Transmission Organizations ("RTOs") and other "organized markets" have often failed to produce expected benefits. Public power is equally concerned that an EIM could subject public power systems to Federal Energy Regulatory Commission ("FERC") jurisdiction. Centralized control by FERC is, of course, the antithesis of local control, one of public power's keystone values. FERC's recent tendency to pursue its jurisdiction aggressively on behalf of renewable producers heightens this concern. For example, FERC in 2011 for the first time asserted its "FERC-lite" jurisdiction, invalidating the Bonneville Power Administration's approach to managing periods of excess wind generation. As this article explains, public power is right to be concerned that an EIM could result in both expanded FERC jurisdiction and a broader push toward a West-wide RTO. Both risks, however, can be mitigated by insisting on specific structures and conditions for EIM participation. Relevant Precedents: FERC Jurisdiction Over Consumer-Owned Utilities Operating in Organized Markets In the industry's first few decades, federal jurisdiction was of little concern to public power. Public power operated in its own sphere, governed by elected representatives of the citizens it serves, generally free from either state or federal rate regulation. With increasing integration of the industry and regulatory restructuring, these jurisdictional lines have blurred. In some cases, Congress added new statutory authority giving FERC jurisdiction over specific aspects of consumer-owned systems. In other cases, FERC leveraged its existing statutory authority. For example, to enforce its "open access" transmission regime, FERC required consumer-owned transmission systems to adopt "Safe Harbor" open access tariffs so that they could obtain "reciprocal" access to IOU-owned transmission facilities. An examination of recent precedents from Western RTOs and cooperative transmission ventures demonstrates that there is some basis for concern that participation in an EIM could subject a consumer-owned utility to new FERC jurisdiction. Perhaps most notoriously, after the meltdown of Western power markets in 2000-01, FERC attempted to force public power entities that had participated in the California ISO and PX markets to disgorge refunds. Ultimately, the Ninth Circuit rejected those attempts, concluding that the Federal Power Act plainly prohibits FERC from exercising its refund authority over public power entities. The Court, however, left the door open for California to pursue refunds in court. This opening has proved costly for public power. For example, in April, the U.S. Court of Claims allowed California's contract-based lawsuit against the Bonneville Power Administration ("BPA") to move forward. This is a particularly bitter pill for Northwest public power ratepayers, many of whom suffered greatly from California's missteps during the 2000-01 market meltdown and were generally denied relief by FERC. They now face the prospect of paying again for California's mistakes, this time through inflated BPA rates. The Courts have also concluded that consumer-owned utilities participating in the California Independent System Operator ("ISO") may be subject to just-and-reasonable rate regulation where the rates charged by the consumer-owned utility affect the FERC-jurisdictional rates charged by the ISO. When the City of Vernon, California's municipal utility joined the ISO, the rates charged by Vernon for ISO-administered access to Vernon's transmission system became an element of the transmission rates charged by the ISO. FERC concluded that, because Vernon's transmission rates were an element of the ISO's transmission rates, Vernon's rates must be subject to FERC oversight to ensure that the resulting transmission rates charged by the ISO are just and reasonable. After extended litigation, the Ninth Circuit ultimately upheld this result. FERC has asserted a similar form of jurisdiction over public power entities in other regions, as well. For example, where Basin Electric Cooperative entered into a joint-use transmission arrangement with a FERC-jurisdictional IOU, FERC asserted jurisdiction to review Basin's transmission rates because Basin's rates are a component of the rates charged by the joint-use system. On the other hand, the courts have flatly rejected FERC attempts to force changes in the management structure of the RTOs and ISOs. Following the 2000-01 crisis, FERC concluded that the ISO's management structure was partly to blame for market dysfunctions, and attempted to force a change in the composition of the ISO Board. The U.S. Court of Appeals for the D.C. Circuit rejected FERC's assertion of authority. Of particular interest, the Court of Appeals rejected FERC's claim that its authority to regulate the "practices" of jurisdictional utilities allows FERC to order specific changes in the management of those utilities. FERC's reading of the statute, the Court concluded, ignores the surrounding statutory language, which is aimed at providing FERC with authority to regulate rates, not every aspect of utility operations. Thus, the Court reasoned, FERC can regulate utility "practices" only if they are directly connected with the utility's rates. Because there was no clear connection between the structure of the ISO's board and the rates it charged, the Court concluded, FERC's attempt to dictate the structure of the ISO's governing board exceeded its statutory authority. In summary, the participation of consumer-owned utilities in "organized markets" such as the California ISO is a mixed bag. FERC has on a number of occasions asserted jurisdiction over consumer-owned utilities participating in ISOs or RTOs. And, while the Courts have rejected some of these assertions, they have upheld others. Consumer-owned utilities contemplating participation in the EIM are therefore well-advised to exercise caution if they wish to avoid becoming subject to increased FERC jurisdiction. Limiting FERC Jurisdiction in an EIM While exposure to FERC jurisdiction is a valid concern, expanding FERC jurisdiction need not follow inevitably from a decision to participate in the EIM. For example, a number of consumer-owned utilities participate along with FERC-jurisdictional IOUs in regional transmission bodies such as ColumbiaGrid and WestConnect. FERC precedent regarding these and similar regional ventures demonstrate that, with appropriate safeguards, FERC's assertion of jurisdiction over consumer-owned participants can be limited. Such safeguards include: • Defining off-ramps for consumer-owned utilities. Perhaps the best safeguard for consumer-owned utilities is a clear "off-ramp," allowing them to terminate their participation in EIM if FERC attempts to extend its jurisdiction over them. For example, WestConnect proposed a transmission pilot project aimed at reducing the "pancaking" of transmission rates across the systems of its members, which included both jurisdictional IOUs and non-jurisdictional co-ops and consumer-owned utilities. FERC approved an agreement allowing participants to withdraw at any time prior to the start-up of the pilot, at any time after start-up as a result of adverse regulatory action, and after ninety days' notice for any other reason occurring after start-up. Similarly, the Nebraska Public Power District ("NPPD") and Omaha Public Power District ("OPPD") in the Southwest Power Pool are authorized to withdraw from the Southwest Power Pool if FERC does not accept their rates or transmission revenue requirements. The ability to withdraw from the organization administering EIM in response to an unjustified claim of FERC jurisdiction gives consumer-owned participants powerful leverage to prevent FERC from overstepping its bounds. • De-coupling jurisdictional and non-jurisdictional rates. It may be possible to structure an EIM so that the rates paid to non-jurisdictional utilities remain separate and distinct from the rates paid to FERC-jurisdictional IOUs. For example, before the WestConnect transmission pilot discussed above went into effect, FERC declared that the rates charged by non-jurisdictional utilities were not subject to FERC review because they did not affect rates charged by jurisdictional IOUs and additional safeguards, such as rate caps, were in place to ensure that jurisdictional rates remain just and reasonable. Similarly, FERC has approved participation of NPPD and OPPD in the Southwest Power Pool subject to agreements that explicitly limit FERC's authority to review the NPPD's and OPPD's rates or revenue requirements. As these examples demonstrate, it may be possible to limit FERC jurisdiction by separating EIM rates paid to non-jurisdictional utilities from rates paid to jurisdictional utilities, or by insisting upon specific contractual limits on FERC jurisdiction over public power. • De-coupling the EIM market from transmission rates. The EIM should be limited to the specific function of allowing regional exchange of regulating reserves and other sub-hourly products. It should not operate a centrally-administered transmission market. Limiting the EIM's functions in this manner will prevent FERC from attempting to leverage its jurisdiction over interstate transmission. • Recognizing public power authorities. The authority of public power governing bodies to set their own rates and policies is, of course, a cornerstone of the public power movement. Similarly, consumer-owned utilities operate under unique limitations arising from, for example, state law and from federal rules governing municipal bonds. Consumer-owned utilities participating in the EIM should insist on language in governing agreements that will prevent the actions of the EIM from violating state law, putting tax-exempt financing at risk, or displacing the basic functions of publicly-elected governing bodies. Such mechanisms not only assure consumer-owned utilities that they are operating within the boundaries of existing law, but also serve to limit FERC jurisdiction by requiring FERC to abide by the legal limits faced by consumer-owned utilities. It is important to recognize that, in the Energy Policy Act of 2005, Congress granted FERC new refund authority over consumer-owned utilities. This new authority allows FERC to order refunds from consumer-owned utilities for short-term sales (sales for periods of less than one month) if the sales are "through an organized market in which the rates for sale are established by [FERC]-approved tariff (rather than by contract)" and the sale violates that tariff. FERC has yet to provide any clear guidance as to the meaning of this new authority. Hence, consumer-owned entities contemplating participation in an EIM must recognize the existence of the new authority, devise strategies for limiting the authority, and consider the possibility that their short-term sales on the EIM could be subject to FERC-ordered refunds. Limiting EIM Expansion As with FERC jurisdiction, public power is rightly concerned that, even if an EIM is wise, it could pave the way for a full-fledged RTO, with its attendant costs, complications, and market manipulation risks. In the same way that public power participants in an EIM should insist on limits to FERC jurisdiction, they should also insist on limits that prevent EIM from becoming a "slippery slope" to a West-wide RTO. Two considerations are key. First, there is no reason that the EIM itself should be considered an RTO. On the contrary, if the functions of the EIM are strictly limited to its core mission, it would not be an RTO because it would not operate all the functions of an RTO. Rather, it would be more like ColumbiaGrid or WestConnect, organizations which perform limited transmission functions but are neither registered as an RTO nor considered to be an RTO by FERC. Second, the governing documents of EIM should either prohibit expansion of the organization or else require a supermajority to move forward with any new functions. For example, ColumbiaGrid's governing documents allow it to take on new functions only with a super-majority vote of its members. Such a supermajority requirement can prevent movement toward in RTO unless a strong regional consensus, which necessarily must include public power, develops in favor of RTOs. Conclusion Public power has good cause to be concerned that participation in an EIM could result in expanded FERC jurisdiction over consumer-owned utilities and could be a step toward a West-wide RTO. These are not inevitable consequences of an EIM, however, and a number of proven safeguards are available to prevent these outcomes if consumer-owned utilities elect to participate in the EIM. (Note: While the article is officially the "Cover Story" of the May NWPPA Bulletin, the photo on the cover is in fact a vendor from NWPPA's recent Engineering and Operations Conference. This is because, despite a valiant effort, NWPPA's editors could not find a compelling graphic concerning the EIM or FERC jurisdiction.)